Pending home sales in the U.S. unexpectedly plunged in October to their lowest levels since record-keeping began over two decades ago, even below readings seen during the housing crisis in 2008.
The National Association of Realtors (NAR) reported Thursday that its index of pending sales contracts signed on existing homes retreated 1.5% from September. On an annual basis, signings were a staggering 8.5% lower than the same month last year.
October’s reading marks a continuation of the housing market’s steep slide over the past year from blistering pandemic-era sales levels as mortgage rates rocket higher in the most dramatic housing finance shake-up in decades.
“Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied,” said NAR Chief Economist Lawrence Yun.
Spike in Mortgage Rates Strangles Demand
The October pending home sales data reflects buyer activity when popular 30-year fixed mortgage rates shot up above 8% in mid-October before settling back around 7% in more recent weeks.
Skyrocketing borrowing costs over the past year have rapidly depleted home shoppers’ budgets and purchasing power, squeezing huge numbers of Americans out of the market entirely and forcing others to downgrade to lower price points.
With the average rate on a 30-year fixed loan more than double year-ago levels despite the recent retreat, still-high financing costs in tandem with stubbornly elevated home prices continue dampening affordability and sales.
All U.S. regions saw contract signings decline on a monthly basis in October except the Northeast. The Western market, where homes are typically the nation’s most expensive, recorded the largest monthly drop.
Pending transactions fell across all price tiers below $500,000 while rising for homes above that threshold. The shift partly reflects moderately improving supply conditions on the high end, even as demand rapidly recedes at lower price points.
Home Prices Still Climbing for Now
Even against shrinking demand, exceedingly tight inventories of homes listed for sale have so far prevented any meaningful cooling in the torrid home price appreciation that’s stretched affordability near the breaking point for many buyers.
The median existing home sales price rose 6.6% on the year in October to $379,100. While marking a slowdown from mid-2021, when prices were soaring 20% annually, it still represents an acceleration over the 5.7% rate seen last October.
With few homes hitting the market, bidding wars continue breaking out for even modest starter homes in many areas. In such seller-favorable conditions, a plunge in overall sales does little to crimp further rapid home value growth.
Leading indicators suggest home prices likely still have further to climb before lackluster sales and eroding affordability force more substantive cooling. But shifts in home values and sales usually lag moves in rates and mortgage activity by several months.
“The significant decline in pending sales suggests…further weakness in closed existing home sales in upcoming months,” said Swiss bank UBS economist Jonathan Woloshin.
With mortgage activity plunging to a quarter-century low, actual completed sales are widely expected to continue deteriorating into early next year or beyond as the pipe of signed deals still working through the market keeps drying up.
Path Ahead for Housing Market
Most economists expect home sales will likely continue slumping over the next six months or so until lower financing costs combined with a slow improving inventory offer some stability.
“We think housing activity has little prospect of bottoming out until spring 2024, at the earliest,” said Nancy Vanden Houten of Oxford Economics. She projects existing home sales will fall nearly 25% in 2024 from current-year levels.
Other analysts say still-strong demographics and a solid job market should prevent an all-out housing collapse, but that robust spring and summer recovery rallies like those seen earlier this century are unlikely in coming years.
Instead, as mortgage rates settle somewhere above 6% and homes trickle back on the market, sales activity should slowly stabilize around 10-15% below 2018-2019 levels through 2024 and beyond – marking a ‘new normal’ after ultra-hot pandemic conditions.
“I expect mortgage rates to moderate…helping home sales firm up a bit, but still remain below pre-pandemic activity,” said Yun. With fresh records signaling just how devastating this year’s rate spike proved for buyers, Yun expects the spring thaw in housing demand could come slower next year than markets anticipate.
